QUESTION ONE – In your experience, what are the key considerations that international clients should have the front of mind when assessing a target company for acquisition in your jurisdiction?
The keys considerations to be borne in mind are:
Why does the seller want to sell?
As Romania has only been a market economy for approximately 20 years, many Romanian shareholders are reluctant to sell the business although, intellectually, they know they should. Romanian companies in many cases are family businesses and therefore there is a close bond between the seller and the business. The first thing to ascertain is there a real intention to sell.
Will the acquirer put in place its own management or will it continue to use the existing management?
Romanian owners in many cases have been bad at delegating, and therefore any middle management will be of an executive nature rather than a decision-making group. Many companies rely on the existing middle management who often do not have the necessary skills to run a business. Further, in many cases where Romanians are given authority, they do not understand the nature of their role and can alienate other members of the management team. An investor should consider bringing in its own management for a period to run the company.
The internal management of the acquiring company will need to manage the investment. Just because their management will speak the language of the acquiring company it does not mean that they understand exactly what is being asked of them. Also, care needs to be taken that they won’t seek to promote their friends and family into positions of power and reward in the company.
QUESTION TWO – How would you, as a professional advisor, approach the due diligence process to ensure all bases are covered prior to a sale price being agreed?
We have a full due diligence checklist prepared in Romanian which we give to the management of the target company during the first meeting. We try and convey to them that we are not there to criticise them or the way the business is run but to seek to help them sell the company. We know that we will find issues which can/ will be resolved. The meeting with the existing management is very important as it will enable us to extract information which will not be disclosed in the answers to the questionnaires.
The due diligence team should consist of Romanian lawyers. This enables them to communicate with the management team and staff of the target company and understand what is really being said and divulged; and what is not.
We work closely with the other firms instructed by the client, carrying out any financial or commercial due diligence to ensure that we are looking at those items from the legal perspective that they considered necessary, and which affect the price.
QUESTION THREE – Once an acquisition is agreed, what are the key clauses or warranties and indemnities you would recommend for inclusion in the sales contract?
As Romania is a code law country, several representations and warranties are included by reference to the commercial and civil code. We would ask for warranties for taxation, both past and present, which could lead to requesting an escrow account to cover the taxation warranties until any prescription period has expired. If intellectual property is involved, there should also be clauses covering the usage and variation of such property. Property ownership and usage should also be covered to ensure that the business can continue to be operated. Finally, we would ask for non-compete and non-disclosure clauses from the seller.
Tips for completing a successful cross-border acquisition
Take advice and consult with a non-Romanian local lawyer. They often can advise on the potential pitfalls in the acquisition, but also add perspective as a non-Romanian working in Romania.
Make sure your international advisors, if involved, listen to the local advisors who have the contacts and knowledge to know what is really being said. While the international advisor will normally drive the case, the local lawyers know what will work in accordance with local law. Any conflict should be resolved in favour of Romanian law. Common law documents often do not work and must be amended for local circumstances.
Just because someone speaks your language, it does not mean that they fully understand the nuances of any question or indeed understand any questions you may raise. Any replies need to be carefully analysed, as they may not be using the words in the usual context. A misunderstanding can occur which will destroy the transaction. Do not rely on local contacts supplied by the sellers, as their loyalty will not necessarily be to you.
This excerpt was taken from the IR Global Guide: International Deal Making: Assisting Acquirers. To view the full publication, please click here.
